Restrictions on the creation of money by the private sector
Posted: August 11th, 2021, 4:51 pm
Hi folks
As I divulged over here Pay rises in the Gold Standard Era, I'm currently reading Mervyn King's "The end of alchemy". This book also discusses in depth the creation of money in economies like ours.
If I recall correctly, someone from TLF (it might have been Go Seigen, apologies if I've misremembered) who informed me ages ago that its commercial banking that is actually behind most of the "creation of new money" these days. Not the central bank. However the above book also communicates this:
What is striking about these figures is that the production of money has become an enterprise of the private sector. The amount of money in the economy is determined less by the need to buy stuff and more by the supply of created by private sector banks responding to the demand from borrowers. In normal times, changes in the supply of credit will be driven by changes in the demand from borrowers to which banks react, and in turn those developments will reflect the influence of the of the interest rate set by the central bank.
However, what I wondering was doesn't the BoE have any other way, i.e. other than increasing the interest rate to curtail the potential for excess lending by private sector banks. For instance don't all commercial banks ultimately have to bank with, and hence clear transactions with, the central bank, so in that case, I assume that this means, if a particular banks lends out too much money to its customers, doesn't that hit a kind of logical overdraft limit for that bank with the BoE?
thanks Matt
As I divulged over here Pay rises in the Gold Standard Era, I'm currently reading Mervyn King's "The end of alchemy". This book also discusses in depth the creation of money in economies like ours.
If I recall correctly, someone from TLF (it might have been Go Seigen, apologies if I've misremembered) who informed me ages ago that its commercial banking that is actually behind most of the "creation of new money" these days. Not the central bank. However the above book also communicates this:
What is striking about these figures is that the production of money has become an enterprise of the private sector. The amount of money in the economy is determined less by the need to buy stuff and more by the supply of created by private sector banks responding to the demand from borrowers. In normal times, changes in the supply of credit will be driven by changes in the demand from borrowers to which banks react, and in turn those developments will reflect the influence of the of the interest rate set by the central bank.
However, what I wondering was doesn't the BoE have any other way, i.e. other than increasing the interest rate to curtail the potential for excess lending by private sector banks. For instance don't all commercial banks ultimately have to bank with, and hence clear transactions with, the central bank, so in that case, I assume that this means, if a particular banks lends out too much money to its customers, doesn't that hit a kind of logical overdraft limit for that bank with the BoE?
thanks Matt